Freddie Mac suffers $3.4 bln in derivative losses in Q4
Is this bad? It does not look like it is!
WASHINGTON, Feb 19 (Reuters) - Freddie Mac saw $3.4 billion in quarterly derivative losses due to declining interest rates, the government-controlled mortgage finance company said on Thursday.
The losses caused a $1.9 billion drop in fourth-quarter earnings to $227 million, the company said, its lowest profit in that quarter since 2001.
Freddie Mac also said it will pay $851 million to the U.S. Treasury in March, its smallest dividend payment since the first quarter of 2009.
Freddie Mac Chief Executive Officer Donald Layton said a hefty derivative loss could require the company to draw money from the Treasury. But the chances of this occurring were "highly, highly" remote, he said in a telephone interview.
The CEO said that for such a thing to happen this year, the market would have to factor in very extreme interest rate moves. He added that as Freddie's reserve cushion declines, its usage of derivatives to hedge against interest rate risk also falls.
Layton said the company needs to hedge its interest rate risk with derivatives. When interest rates fall, as long-term rates did this year, Freddie will suffer losses on its derivatives, he said. The opposite will occur if rates move higher, as they have at the start of this year, he said.
Over the long term, Layton said, the difference in derivative gains and losses is small.
"We believe it's smart for us and the U.S. taxpayer to not be overly concerned with quarter-to-quarter ... earnings volatility," he told reporters on a conference call.
So this 3.4 billion allows freddie to keep money it would otherwise send to treasury!!
And if interest rates go up, freddie will gain on its derivatives. So are interest rates going up or down in 2015? Up is the answer and freddie will make money on this bet and keep that money, instead of sending it to Treasury!!